Tuesday night the Greek government survived a no confidence vote, with relative ease, thus allowing the Greek government to go forward negotiating a new bailout. The government faces a vote over "new austerity" measures, but there is no more reason to believe that Greece will keep its promises to sell assets and cut spending this time than it has over the past year.
Last year's mammoth €110 billion ($157 billion) European Union and International Monetary Fund bailout was supposed to cover Greece's financial problems for three years. But just one year later Greece is seeking another €100 billion.
The G-7 countries and major banks met well into Monday morning but failed to reach an agreement on any more than a temporary bridge loan.
Despite Greece's promises, government spending is up over last year's already bloated levels, the deficit is bigger than ever, and it has utterly failed to meet the promised sell-off of some government assets. Not a single public bureaucrat has been laid off so far.
Greece possesses the assets to easily pay off most of its debt. But the politicians and voters just don’t want to. Other countries seem to realize that they have little bargaining power with Greece.
The very high interest rates on Greek bonds -- 17 percent -- imply that lenders are highly certain that Greece will default long before their 10 year bonds are paid off.
According to Alan Greenspan, former Federal Reserve chairman, such a default has the "potential to push the U.S. into another recession," as the problems for European banks would spill over to American banks.
The new bailout would just temporarily keep the creditors at bay, only enough to cover Greece's current deficits, not enough to pay off any of the debt that has accumulated. It just “kicks the can down the road” for someone else to eventually solve the problem. Delaying action lets things get worse and allow continued fiscal irresponsibility. In just the last month, Greece's outstanding government debt has increased from €330 billion to €347 billion.
Greece's Finance Ministry estimates that, on its current track, government debt will reach €501 billion by 2015. That comes to a debt of over $66,000 per person, and Greece’s personal income is only about two-thirds our own. Greater deficits and 17 percent interest rates can cause difficult problems to grow into impossible ones very quickly.
Greece can and should do much more. Both the European Central Bank and the IMF estimate that Greece can pay off €300 of the €347 billion debt by selling off shares the government owns in publicly traded companies and much of its real estate holdings. The government owns stock in casinos, hotels, resorts, railways, docks, as well as utilities providing electricity and water. But Greek unions fiercely oppose even partial privatizations. Rolling blackouts are promised this week to dissuade the government from selling of even 17 percent of its stake in the Public Power Corporation.
Of the 75,000 government-owned properties, the government is preparing to lease or sell a mere 20 to 30 properties, the first to be put up for sale in a few months. Most of 75,000 properties are undeveloped or sites that are no longer being used, such as the extremely valuable old decommissioned Athens airport at Hellenikon. But Greece can't even bring itself to sell most of this small set of property, instead preferring 30 to 40 year leases, something much less valuable to companies who often seek to make large investments in the property over a long period of time.
Banks in France and Germany have been pressured by their governments to buy Greek debt. Now if Greece defaults, those banks will face major losses. The new bailout for Greece is thus necessary to keep some European banks from collapsing.
Last week, because of three large French banks’ Greek exposure, Moody's rating agency announced a review to potentially lower their credit ratings. Indirectly, if Greek bonds are allowed to default, bonds in Ireland, Portugal, Spain and Italy will be seen as much riskier. This in turn causes interest rates on their bonds to rise and makes these countries’ financial positions even more precarious.
Greeks apparently believe that they have Europe and the world over a barrel, that they can make the rest of the world pay their bills by threatening to default. Greece’s default would be painful for everyone, but for Europe and the United States, indeed for the world, the alternative would be even worse. If politicians in Ireland, Portugal, Spain, Italy, and other countries think that their bills will be picked up by taxpayers in other countries, they won’t control their spending and they won’t sell off assets to pay off these debts. Countries such as Greece have to be convinced that they will bear a real cost if they don’t fix their financial houses while they still have the assets to cover their debts.
Picking up the tab for Greece’s spending excesses will be tough. But, as hard as it might be to believe, Greece is a relatively small country. The real problem is the incentives we are giving to other countries. We have to make sure that “Kicking the can down the road” isn’t an option.
John R. Lott, Jr. is a FoxNews.com contributor. He is an economist and author of the revised edition of More Guns, Less Crime (University of Chicago Press, 2010).
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